Populist Humala Wins Election, Negative For Peruvian Markets

Exit polls and quick counts at some polling stations show populist Humala winning 51.5%-48.5% over Fujimori in the second round presidential vote. If this is confirmed in official results, it would be very negative for Peru near-term. While Humala has professed his desire to become another Lula, there are of course suspicions that he still wants to be another Chavez. This will take weeks, if not months to sort out as Humala unveils his cabinet. Let’s look back at the Brazilian example, when investors had no idea what to expect from then-populist Lula. He won his first term after the second round vote October 27 2002. The real weakened almost 80% vs. the dollar in the six months from April 10 to October 10 2002, when it peaked at 4 per dollar as Lula gained in the polls. From October 27 2002 to January 1 2003 when Lula was inaugurated, the real recouped about 5% of its losses but trading was very choppy and the real remained on its back foot. It wasn’t until mid-February 2003 that a sustained BRL rally began to take hold. At that point, investors became comfortable with Lula’s economic team, his cabinet, and his general attitudes towards markets. The bottom line was that Lula inherited a strong, vibrant economy and was smart enough not to mess with success. Will Humala learn that lesson too?

Regaining market confidence is what Humala will need to do in his crucial first few months. He has reportedly asked some orthodox economists from the Toledo administration to be advisors, and he has also gotten an endorsement from former central bank President Dancourt. However, foreign investors will remain wary until his economic team has been finalized along with the rest of his cabinet, preferably before his inauguration July 28. Humala’s victory could lead to a near-term spike up in gold, zinc, and copper due to uncertainty about what foreign firms are going to do with regards to investment and the development of mining resources in Peru. The sol and the equity market are likely to remain under pressure near-term until Humala’s message is clear. Let’s hope that happens sooner rather than later, and that Humala does not mess with success either.

Win Thin is the Head of Emerging Markets Currency Strategy at Brown Brothers Harriman. He has a broad international background with a special interest in developing markets. Win received his Ph.D. in economics from Columbia University in 1995, specializing in international and development Economics. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983.

The issue that the markets are ignoring is the wealth distribution in Peru is causing problems. Unless these are dealt with more equitably then it will be far more disruptive.

Anonymous says 8 years ago

The issue that the markets are ignoring is the wealth distribution in Peru is causing problems. Unless these are dealt with more equitably then it will be far more disruptive.

Anonymous says 8 years ago

Win Thin, I have to say your comparision to Lula is a bit off. Lula did not inherit a strong economy. Lula came to power on the back of a Brazilian banking crisis and maxidevaluation that began in 1998 after the Asia Currency crises and the Russia default. The Real broke its currency band and went from 1.2/USD to 2.0/USD in one month in Jan. 1999. The stock market went from 14000 in 1997 to 5000 in Jan 1999. Brazil was in crisis prior to Lula even being a candidate.

When Lula was nearing power, markets clearly worsened in anticipation of anti-market policies and most importantly, a sovereign default which was a near logical possibility given the series of defaults in Asia and Russia just recently making the will to default from Lula a real threat. Lula inherited some reform policies that came during the crisis to clean up the banking sector and he inherited an industry liberated by recent privitaizations. That layed the foundation on which a tremendous commodities boom was to secure a historic economic cycle for Brazil. The reversal of markets overshooting Lula fears, Greenspans ridiculous interest rate policy of 1% and the other factors i mentioned are what gave Brazil its great market upswing. So Lula inherited an oversold market and coincidently well positioned economy for the global macro factors ahead.

Humala is entering Peru with engines already ago. The market returned 65% last year and is only now correcting for Humala. This correction is pure political risk, where as Lula was entering into a bear market that eventually turned. Peru, unlike Brazil, is not positioned for possible default (far from it). What is the market afraid of? That Humala will take some corporate profits and redistribute it to the poor? Isnt that what Lula did? Its the hallmark of his administration. The only policies Lula did that were effectually different than his more market friendly predecessor were the agressive social safety nets. Yet the markets cheered Brazil. Peru, like Brazil, will depend not on a more “socialist” policy, but rather on commodities, global interest rates, and the soundness of its fiscal and banking policies. Only thing to derail that is if Humala “went crazy” like they thought Lula would, but he has much less reasons to given Peru’s starting conditions.

Anonymous says 8 years ago

Win Thin, I have to say your comparision to Lula is a bit off. Lula did not inherit a strong economy. Lula came to power on the back of a Brazilian banking crisis and maxidevaluation that began in 1998 after the Asia Currency crises and the Russia default. The Real broke its currency band and went from 1.2/USD to 2.0/USD in one month in Jan. 1999. The stock market went from 14000 in 1997 to 5000 in Jan 1999. Brazil was in crisis prior to Lula even being a candidate.

When Lula was nearing power, markets clearly worsened in anticipation of anti-market policies and most importantly, a sovereign default which was a near logical possibility given the series of defaults in Asia and Russia just recently making the will to default from Lula a real threat. Lula inherited some reform policies that came during the crisis to clean up the banking sector and he inherited an industry liberated by recent privitaizations. That layed the foundation on which a tremendous commodities boom was to secure a historic economic cycle for Brazil. The reversal of markets overshooting Lula fears, Greenspans ridiculous interest rate policy of 1% and the other factors i mentioned are what gave Brazil its great market upswing. So Lula inherited an oversold market and coincidently well positioned economy for the global macro factors ahead.

Humala is entering Peru with engines already ago. The market returned 65% last year and is only now correcting for Humala. This correction is pure political risk, where as Lula was entering into a bear market that eventually turned. Peru, unlike Brazil, is not positioned for possible default (far from it). What is the market afraid of? That Humala will take some corporate profits and redistribute it to the poor? Isnt that what Lula did? Its the hallmark of his administration. The only policies Lula did that were effectually different than his more market friendly predecessor were the agressive social safety nets. Yet the markets cheered Brazil. Peru, like Brazil, will depend not on a more “socialist” policy, but rather on commodities, global interest rates, and the soundness of its fiscal and banking policies. Only thing to derail that is if Humala “went crazy” like they thought Lula would, but he has much less reasons to given Peru’s starting conditions.

Anonymous says 8 years ago

Win Thin, I have to say your comparision to Lula is a bit off. Lula did not inherit a strong economy. Lula came to power on the back of a Brazilian banking crisis and maxidevaluation that began in 1998 after the Asia Currency crises and the Russia default. The Real broke its currency band and went from 1.2/USD to 2.0/USD in one month in Jan. 1999. The stock market went from 14000 in 1997 to 5000 in Jan 1999. Brazil was in crisis prior to Lula even being a candidate. When Lula was nearing power, markets clearly worsened in anticipation of anti-market policies and most importantly, a sovereign default which was a near logical possibility given the series of defaults in Asia and Russia just recently making the will to default from Lula a real threat. Lula inherited some reform policies that came during the crisis to clean up the banking sector and he inherited an industry liberated by recent privitaizations. That layed the foundation on which a tremendous commodities boom was to secure a historic economic cycle for Brazil. The reversal of markets overshooting Lula fears, Greenspans ridiculous interest rate policy of 1% and the other factors i mentioned are what gave Brazil its great market upswing. So Lula inherited an oversold market and coincidently well positioned economy for the global macro factors ahead.Humala is entering Peru with engines already ago. The market returned 65% last year and is only now correcting for Humala. This correction is pure political risk, where as Lula was entering into a bear market that eventually turned. Peru, unlike Brazil, is not positioned for possible default (far from it). What is the market afraid of? That Humala will take some corporate profits and redistribute it to the poor? Isnt that what Lula did? Its the hallmark of his administration. The only policies Lula did that were effectually different than his more market friendly predecessor were the agressive social safety nets. Yet the markets cheered Brazil. Peru, like Brazil, will depend not on a more “socialist” policy, but rather on commodities, global interest rates, and the soundness of its fiscal and banking policies. Only thing to derail that is if Humala “went crazy” like they thought Lula would, but he has much less reasons to given Peru’s starting conditions.

Anonymous says 8 years ago

Win Thin, I have to say your comparision to Lula is a bit off. Lula did not inherit a strong economy. Lula came to power on the back of a Brazilian banking crisis and maxidevaluation that began in 1998 after the Asia Currency crises and the Russia default. The Real broke its currency band and went from 1.2/USD to 2.0/USD in one month in Jan. 1999. The stock market went from 14000 in 1997 to 5000 in Jan 1999. Brazil was in crisis prior to Lula even being a candidate. When Lula was nearing power, markets clearly worsened in anticipation of anti-market policies and most importantly, a sovereign default which was a near logical possibility given the series of defaults in Asia and Russia just recently making the will to default from Lula a real threat. Lula inherited some reform policies that came during the crisis to clean up the banking sector and he inherited an industry liberated by recent privitaizations. That layed the foundation on which a tremendous commodities boom was to secure a historic economic cycle for Brazil. The reversal of markets overshooting Lula fears, Greenspans ridiculous interest rate policy of 1% and the other factors i mentioned are what gave Brazil its great market upswing. So Lula inherited an oversold market and coincidently well positioned economy for the global macro factors ahead.Humala is entering Peru with engines already ago. The market returned 65% last year and is only now correcting for Humala. This correction is pure political risk, where as Lula was entering into a bear market that eventually turned. Peru, unlike Brazil, is not positioned for possible default (far from it). What is the market afraid of? That Humala will take some corporate profits and redistribute it to the poor? Isnt that what Lula did? Its the hallmark of his administration. The only policies Lula did that were effectually different than his more market friendly predecessor were the agressive social safety nets. Yet the markets cheered Brazil. Peru, like Brazil, will depend not on a more “socialist” policy, but rather on commodities, global interest rates, and the soundness of its fiscal and banking policies. Only thing to derail that is if Humala “went crazy” like they thought Lula would, but he has much less reasons to given Peru’s starting conditions.